Gary,
Ericsson Telephone(ERICY) would be a good candidate for a hostile takeover? Also looks like a good long term buy? Just imagine what the new spokes model for Ascend would look like?<vbg>
COMMUNICATIONS
SMORGASBORD
How Ericsson plans to add datacom
and broadband wireless technologies
By Alex Gove
Wall Street has embraced the company founded
by Lars Magnus Ericsson. In the last year
Ericsson Telephone's stock has risen 81.1
percent, and over the last five years its share price
has skyrocketed 731.2 percent (a figure that
outstrips the performance of the Dow Jones
Equity Market Index over the same period by
more than 500 percent). Ericsson owes much of
its success to the worldwide explosion of wireless
communications.
Although the 121-year-old company also deploys
fixed networks, radio communications accounted
for 63 percent of its revenues in 1996, and sales
of mobile systems and telephones increased by
more than 50 percent during this same period.
Moreover, with the number of mobile subscribers
poised to pass 500 million by the year 2000 and
microwave technology increasingly blurring the
line between wireless and wire-line technology,
Ericsson would seem to have continued good
growth potential, particularly given its presence in
more than 130 markets worldwide.
But despite its extraordinary growth, the company
is determined to reinvent itself. Ericsson's
consumer business has grown, and it would like
to raise market awareness, particularly in the
United States. The company also is actively
promoting a new mobile telephony standard that
will deliver voice, data, and video at speeds up to
2 mbps. But Ericsson's most dramatic shift may
be its decision to focus on data and IP
communications. Convinced that it can play a role
in the convergence of datacom and telecom, the
company is increasingly looking to Silicon Valley
for ideas. In addition to consolidating its fixed
network operations into one division, Ericsson
recently invested in a datacom startup and has
plans to back many more.
Why mess with success? The Herring traveled to
Stockholm to investigate.
Pepsi, Disney, Ericsson
It's a little disconcerting to see people talking on
cell phones while rollerblading through the streets
of Stockholm, but you get used to it. Almost 40
percent of the city's residents carry mobile
phones. Scandinavia's overall penetration rate of
30 percent is almost twice that of the United
States. But despite Scandinavia's ardor for the
phone, the region's small size has compelled the
company to concentrate on international business,
according to Ericsson CEO Lars Ramqvist. "We
have no home market," he says flatly.
Ericsson has always had a global focus. It
supplied phones for the Forbidden City during the
last emperor's reign. Today, Ericsson claims that
it is the largest supplier of mobile phones in China
(its second-largest market) and the third-largest
manufacturer of digital phones worldwide, behind
Motorola and Nokia Telecommunications. On the
systems side, the company estimates that 54
million of the world's 137 million mobile phone
subscribers are connected to Ericsson systems,
an astonishing 39 percent of all users.
As for the United States, it is Ericsson's biggest
market but also one in which the company name
remains largely unrecognized. Consider this: last
year, Ericsson's U.S. sales amounted to $2.6
billion, and Bo Hedfors, president of Ericsson
USA, predicts that 1997's number will be 25
percent higher. What's more, Ericsson is the
leading manufacturer of digital phones in the
States. And yet, the company admits, only one in
five Americans recognize the name Ericsson (and
that's with prompting).
Ericsson's primary customers have been network
operators, but with the explosion of its mobile
phone market, the company has resolved to make
more of a name for itself with consumers. Last
year, Ericsson became the title sponsor for the
Carolina Panthers' football stadium in Charlotte,
North Carolina. The company also is beginning a
new saturation marketing campaign on November
1 that will trumpet James Bond's use of Ericsson
phones and devices in the upcoming movie
Tomorrow Never Dies. And with the
much-delayed U.S. rollout of personal
communications services (or PCS) telephony,
Ericsson may finally become a household name in
the States: the company is the PCS systems
supplier for Pacific Bell, AT&T Wireless, and
other American companies.
But Ericsson has goals more ambitious than
expanding its U.S. presence. In its 1996 annual
report, the company departs from the tedium of
most corporate literature to lay out three
scenarios leading up to the year 2005. In these
sections--curiously titled "Service Mania," "Gran
Tradizione," and "Up and Away"--Ericsson
debates the roles of content brokers, service
providers, and equipment manufacturers in light of
two factors: the escalating competition among
network operators and the growing convergence
of the telecom, computer, and media industries.
According to the report, two trends could
radically change the way Ericsson does
business--operators are demanding more services
to differentiate themselves from one another, and
component suppliers are increasingly
incorporating into their own application-specific
integrated circuits the same functionality that
Ericsson products offer.
One way that Ericsson is addressing these trends
is by playing an active role in the development of
Wideband Code Division Multiple Access
(WCDMA), a new wireless standard that
promises to deliver data at speeds ranging from
385 kbps outside to a blistering 2 mbps indoors.
According to Ake Peerson, vice president of
communications and marketing for Ericsson's
mobile systems division, the world needs
WCDMA because the number of mobile
telephony users and the number of Internet users
are growing at roughly comparable rates. (The
company predicts that the latter figure will
approach 400 million by the year 2000.) Ericsson
is betting that as these markets intersect, the
consumers will demand an integrated
"third-generation mobile multimedia system" that
will offer not only more reliable voice service but
also full-motion video, email, fax, messaging, and
fast Internet access capabilities. In short, the
company believes the mobile phone will become
a thin client in its own right.
WCDMA would enable much richer wireless
applications. In its "Up and Away" scenario, for
example, Ericsson envisions a world in which
advertisers could take advantage of WCDMA
and the GPS capabilities of the Global Standard
for Mobile Communications (GSM) to solicit
customers with direct offers as they near a
store--in return for providing access to the
customer, both wireless service and mobile
phones might be advertiser supported. Ericsson
has formed an alliance with push technology
startup Marimba to research the distribution of
such new applications for wireless devices.
Standard-barriers
Nevertheless, WCDMA faces significant
obstacles both in the United States and abroad.
Ericsson, Motorola, Nokia, Alcatel Alsthom,
Mitsubishi Electric, Northern Telecom, Philips,
and Siemens are already working with the startup
Unwired Planet on new iterations of HDML
(Handheld Device Markup Language), the
dumbed-down version of HTML for mobile
devices that enables the transmission of small
amounts of data. And the enhanced versions of
Digital Advanced Mobile Phone System
(D-AMPS) and GSM--the respective digital
standards for the United States and the rest of the
world--theoretically enable data to be transmitted
at speeds of up to 384 kbps. Finally, because the
market for wireless digital telephony has taken
much longer to develop in the United States than
in other parts of the world, the Federal
Communications Commission has allocated to
PCS operators the spectrum that WCDMA
would need to become a reality.
Jan Uddenfeldt, vice president of research and
development for Ericsson's radio systems
division, acknowledges that differences in markets
and available spectrum will mean that each
operator will have a different approach to adding
bandwidth and concedes that the growth of
WCDMA will depend to a large extent on the
development of compelling applications. But
despite all the limitations, a number of operators
in Europe and Asia are expected to launch
WCDMA service when it becomes available four
years from now. Interest in WCDMA is
particularly high in Japan, where Nippon
Telephone and Telegraph has selected Ericsson
and four other telecommunications companies to
participate in a test next year of WCDMA
technology.
One strong selling point is the fact that GSM
systems will require only minimal upgrades to
accommodate WCDMA. Also, because the
technology is based on an Asynchronous Transfer
Mode minicell transmission protocol called ATM
Adaption Layer 2, operators will be able to use
bandwidth more efficiently: Ericsson predicts that
operators equipped with WCDMA will realize a
tenfold gain in both voice and data capacity.
Ericsson is not the only telecom supplier
developing WCDMA technology, but it believes
it has a real opportunity to lead the process.
Among its strengths, the company cites its long
history in working with WCDMA (it began its
research in 1989), distribution strength in Europe
and Asia, and prowess in implementing new
wireless technologies.
Addition and subtraction
Ericsson is taking an even more radical departure
from its past in the area of data and IP
communications. In Ericsson's view, increased
traffic on business networks and the Internet will
only continue to siphon flow from traditional
telecommunications channels. Because datacom
networks are neither as reliable nor as real-time
as telecom networks, however, Ericsson
executive vice president Anders Igel predicts that
datacom and telecom will eventually merge. He
points out that these networks share many of the
same requirements, like high availability, security,
services, and network intelligence. The company
is so convinced that the two will merge that it has
combined its Microwave Systems, Components,
Business Networks, and Public
Telecommunications divisions into one unit called
Infocom Systems. (In this process it also
transferred or fired 5,000 people, setting off a
minor controversy in left-leaning Sweden.)
According to Mr. Igel, Ericsson has a strong
opportunity to improve the access, network
intelligence, and reliability of datacom and IP
networks because of its large base of carriers.
Ericsson plans to address this opportunity by
adding IP functionality to its switches, so that, in
Mr. Igel's words, data and IP traffic will run "on
the side" of circuit-switched traffic in the switch.
As one harbinger of the future, he points to a new
Ericsson product called the Phone Doubler,
which allows operators to layer a voice call on
top of an Internet session and provide users with
simultaneous voice and IP service on one line.
Like many in the telecom industry, Mr. Igel
predicts that ATM will play a major role in this
shift, and Ericsson has been developing its own
ATM systems. Nevertheless, he claims that these
additions will not require any modifications of
AXE, the company's 25-year-old wireless and
wire-line network infrastructure product and one
of the most important foundations of its success.
Sniffing around startups
According to Mr. Ramqvist and Mr. Igel,
Ericsson will concentrate on public datacom
networks and so-called enterprise-edge
customers (ISPs and carriers that serve enterprise
customers) because it knows the carrier market.
Ericsson is also anxious to avoid the perception
that it is trying to compete with big enterprise
network players like Cisco Systems, Bay
Networks, and Ascend Communications.
Even so, Ericsson has already trampled on
Cisco's shoes in one respect. This August, the
company joined Nortel, 3Com, UUNet
Technologies (WorldCom), Lucent Technologies,
and a Siemens-Newbridge Networks venture in
investing $40 million in Juniper Networks, a
gigabit-routing startup, despite Cisco's plans to
ship a gigabit router next year that delivers data at
speeds of 2.5 billion bps.
Ericsson invested in Juniper in large part because
it has realized that it will have to work more
closely with startups if it hopes to gain access to
the most cutting-edge datacom technology. "We
are not sitting here in Stockholm trying to run the
world," Mr. Ramqvist says. "You need to be
where people are and listen carefully."
In April Mr. Igel and Mr. Hedfors spent several
days visiting startups and venture capitalists on
both coasts. Although Ericsson has not set aside a
fund for venture investments, it has considered
investing in a venture fund.
More tangibly, the company formally opened a
10,000-square-foot facility in Menlo Park called
CyberLab this October to foster working
relationships with Silicon Valley startups, and it is
considering creating a similar facility in New
York's Silicon Alley. According to Gary
Pinkham, vice president of business development
for Ericsson USA, CyberLab will rent space to
select startups at competitive rates and provide
them with a test bed for new technologies and
software. In addition to Juniper and Marimba,
CyberLab is working with a startup called
Moonfire to develop cybercasting applications.
Other focus areas include network computing,
broadband access, small office/home office
applications, public and private intranets, voice
over IP, and "off-the-shelf" WANs.
Corporate venture activity is nothing new in
Silicon Valley, but investments like Juniper mark a
dramatic departure for Ericsson. Although the
company was an early investor in Sun
Microsystems, it retreated from involvement in
startups in the late '80s, possibly because of the
slow payoff of bets it had made in the dedicated
wireless data area. Up until recently, Ericsson
took more pride in the almost $3 billion and
18,000 people that it devotes each year to
in-house research and development. But Ericsson
hopes CyberLab will lead to many more
investments like Juniper. "We are definitely
pushing," says Elbert Ashbaugh, CyberLab's
director.
Full speed ahead
Mr. Ramqvist readily concedes that Ericsson
needs to learn much more in data and IP
communications before it can enter this field, but
Ericsson is determined to become a major player
in dedicated data networks.
Given the rapid expansion of the mobile telephony
market, Mr. Ramqvist's intent to move his
company in new directions like WCDMA and
datacom may raise eyebrows, but he seems
resolute that Ericsson avoid becoming a "niche
player" like Nokia. With telecom and datacom
technologies merging just as quickly as wireless
and wire-line telephony, Mr. Ramqvist believes
that the world is changing too fast for Ericsson to
concentrate on just one segment.
Besides, he adds, he is merely proposing
"upgrading" a circuit-based communications
system that Mr. Igel claims is the world's largest
computer system. "We can't throw out our
existing investment," Mr. Ramqvist says.
The CEO concludes, "We will never again have
such smooth sailing as we have had up to this
very day. Our professional life is dedicated to a
much tougher future than the past." With a strong
history of growth and innovation and an ambitious
agenda ahead of it, Ericsson isn't putting its future
on hold.
Ericsson Telephone at a glance
CEO Lars Ramqvist
Location Stockholm, Sweden
Phone +46/8-719-0000
Web www.ericsson.com
Ownership Public (Nasdaq:
ERICY [ADR])
Founded 1876
Employees 93,949
Product Mobile telephones, mobile
and wired network systems
Partners Hewlett-Packard, Texas
Instruments
Competitors Motorola, Nokia,
Nortel, Lucent Technologies
Revenues FY96 $18.3 billion
Revenues 2Q97 $5.4 billion
Market value $38.7 billion
Jeff |
